RIM Bounces On Optimism Ahead of BB10 Launch

After spending weeks consolidating at the $12 levels, Research in Motion saw a big surge in buying interest Friday and early this week as investors turned bullish about the prospects of the new BB10 platform, ahead of its launch later this month.

After Verizon, AT&T and T-Mobile, it was Sprint’s turn to announce that it will be carrying the upcoming BB10 devices, helping RIM complete a sweep of the four national carriers in the U.S. Earlier, RIM had announced that around 150 carriers across the world are testing out the new BB10 devices in their labs, and that they will be made available soon after BB10 is officially released on 30 January.

However, while it is crucial that BB10 receive all the carrier support necessary for RIM to execute a tough turnaround, this alone doesn’t ensure that BB10 will be accepted by customers. The initial reviews of the platform have been positive (RIM has offered sneak peeks at its new OS) and the company is looking to launch six new BB10 devices at various price points in order to get the best shot at capturing customer as well as developer interest this year.

But, in a smartphone market largely dominated by the iOS and Android, carving out a niche for BB10 will be increasingly tough. More so now that the market seems to be getting even more competitive with Windows Phones’ apparent resurgence during the holiday season. Keeping this in view, we maintain our $12 price estimate for RIM’ stock, about 10% below the current market price. An upside/downside to our price estimate completely hinges on the kind of success and market share gains that BB10 sees in the coming months.

The struggling smartphone maker has seen its BlackBerry unit sales fall year-over-year for the last six consecutive quarters. Last quarter saw RIM ship only 6.9 million BlackBerries, a precipitous drop of more than 50% y-o-y and about 7% q-o-q. However, while sales in the developed markets of the U.S., Canada and U.K. continue to decline steeply, a sustained popularity of the BBM service in international markets has helped RIM defend its subscriber base quite well. It is on the back of its about 80 million strong subscriber base that RIM has been able to continue generating cash through steady high-margin carrier fees despite reporting net losses for three quarters straight.

Moreover, with BB nowhere near its peaks of customer appeal, RIM will be primarily looking to get this installed base to upgrade to BB10 initially. At the same time, RIM will bank on the push e-mail and BBM service revenues from existing subscribers to tide over this difficult transition period. CEO Thorsten Heins, said the company is looking to leverage the security strength of BlackBerry services that governments and enterprises around the world have come to rely on.

Push Email Division Key

We believe the BlackBerry services, which include push e-mail and BBM, are unique value propositions for RIM’s customers, and the company is doing the right thing by realigning its focus on this segment as it negotiates the BB10 transition. Our estimates show that this is RIM’s most valuable division currently, accounting for almost 40% of our price estimate for the stock.

But a carrier push to reduce fees as well as a loss of more enterprise customers to rival platforms, as the bring your own device movement becomes more popular, could hinder RIM’s strategic moves to boost revenues from the services division. In addition, the new BB10 devices will not be supported by the existing enterprise servers, potentially making the BES 10 upgrade process costlier and complicated, thereby reducing RIM’s chances of pushing BB10 into the enterprise base. (see BES 10 Fragmentation Increases The Risk For RIM)

A lot depends on BB10′s reception in the market, and RIM faces an increasingly uphill battle against the two well-entrenched mobile ecosystems of the iOS and Android. Even when BB10 releases, it will have to face some tough competition in the emerging markets where cheap Android smartphones are pushing down prices. Moreover, with BB10 devices to be launched in the first quarter this year, RIM will be subject to greater competitive pressures not only from the iPhone 5 and the slew of Android smartphones being launched, but also from the new Windows Phones, which will have had a three-month head start by the time BB10 launches. The competitive pressure will come not only from potential customers deciding to purchase rival smartphones, but also from developers unwilling to devote their resources to a platform with questionable chances of taking off.

Although we do not expect RIM to ever reach the heights it once commanded in the smartphone market, if RIM does manage to make BB10 a strong smartphone OS, it could still claw its way back into the market and continue to generate cash from its enterprise and retail niche. In this quest, the emerging markets of Asia Pacific, South Africa, Venezuela and Indonesia, where the BB brand has not yet been hit as badly as in the developed markets, could be RIM’s dark horse.

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